Economy meets Brown's target

THE ECONOMY accelerated over the last three months, confounding the doomsayers who predicted that the UK would plunge into recession

It is the first time Britain has avoided a boom-bust cycle in post- war history and hopes of another cut in interest rates were banished yesterday after it emerged that the recovery is stronger then previously thought. Total output grew by 0.5 per cent over the three months to June and 1.2 per cent on the year, ahead of City forecasts of 0.4 per cent and 0.8 per cent. The economy has now avoided a fall in output in any of the last 28 quarters - the longest period since records began in 1955.

The Government seized on the figures, saying it justified its forecasts for 1999 of growth between 1 and 1.5 per cent.

The Treasury's estimate was much derided at the time by private sector economists in the City, who pencilled in sluggish growth of 0.9 per cent.

"These preliminary growth figures are encouraging and in line with the Budget forecast. They show the UK has been steering a course of stability," a Treasury spokesman said.

Assuming there are no shocks in the pipeline, this will be the first business cycle to have achieved a "soft landing" - strong growth declining back to zero without crashing into recession. On Thursday, the Office for National Statistics (ONS) revised the first quarter of the year up from zero growth to 0.1 per cent but revised down the last quarter of 1998 to zero.

Yesterday the City joined in the chorus of approval for the Chancellor and for the independent Monetary Policy Committee that sets rates. "The gloom-mongers have had the rug pulled from underneath them," said Neil Parker of the Royal Bank of Scotland.

John O'Sullivan of Greenwich NatWest said: "It looks like it is going to be bang in the middle of his forecast. Gordon Brown is looking like a forecasting guru."

But economists said the fact the economy troughed six months ago and is now accelerating meant there was little spare capacity. Adam Cole of HSBC said: "With growth running broadly in line with its long term trend, there is no case for lower rates from here."

Stephen Lewis of Monument Derivatives said the MPC would face a dilemma in dealing with current falling inflation and a "significant risk" that it would rise above target on a two-year view. "The MPC can probably do no better thanstand pat on rates until the confusion clears," he said.

Early estimates from the ONS pointed to a broadly based improvement, with both production and services growing.

It said the service sector, despite falls in both business and financial services, grew 0.5 per cent on the back of strong transport sector growth. On the production side there were small rises across the board. Britain's economy has expanded 21 per cent since the last recession ended in mid- 1992, with services output up 27.5 per cent and industrial production up 12.8 per cent, including 9.3 per cent growth in manufacturing.

Meanwhile, house price inflation eased slightly this month, with the annual rate falling to 6.9 per cent from 7.5 per cent in June, the Nationwide building society said. Earlier this week it revised up its forecast for 1999 growth to 8 per cent, almost double its previous 4.5 per cent forecast.

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